A nice speech from Masaaki Shirakawa, Governor of the Bank of Japan. The speech is given on account of Central bank of Finland’s 200th anniversary. So there are some nice anecdotes linking Japanese economy with Finnish:

I felt it would be best to compare the experience of the Japanese economy from its high-growth period onward, with that of the emerging economies which are currently growing at a very rapid pace. Although it is not well-known, Japan’s automobile industry first ventured into the European markets through Finland back in 1962. At that time,Japanese automakers had little name recognition, and one firm, in order to prove the safety of its car to Finnish consumers, had the car driven off a ski-jumping hill. I have been informed that the car landed safely and the driver was not harmed. The 1960s, when such episodes of Japanese firms were born, was the heyday of the Japanese economic miracle.

Yvonne McCarthy of Central Bank of Ireland writes a paper on the topic exploring cases in UK and Ireland.

He says apart from demographic and socio-economic factors, behavioral traits are as important for financial distress. importantly, more impulsive and disorganised people are likely to be more financially stressed compared to composed and organised people.

A nice timely paper by RBI economists Bhupal Singh and Sitikantha Pattanaik. The question they look at it age-old should monetary policy look at asset prices? They look at the issue from RBI perspective.

The study shows that while interest rate changes cause movements in stock prices, monetary policy does not respond to asset prices. This suggests the asset price channel of monetary policy transmission exists. Within assets, credit markets explain a significant part of asset price variations over medium to long-run.

Given this, authors maintain monetary policy should not be looking at asset prices and asset price bubbles could be better addressed through micro and macro-prudential measures. These measures are enhanced when implemented in a sound macroeconomic policy environment.

One usually assumes speeches to start like will cards replace cash not the other way round.

Lars Nyberg of Riksbank argues the opposite and says cash will remain in the system despite rise in digitial transactions. The cash usage would decline but is far from being extinct which will never happen.

Floris Heukelom writes a nice paper on the topic. How behavioral economics program was kind of kickstarted and supported by these two foundations is like a superb case (and victory) on how institutional support can deliver great results.

Behavioral economics did not really gain momentum despite Herbert Simon being acknowledged by Nobel Committee in 1978 for his work on bounded rationality. Tversky and Kahneman wrote their landmark Prospect Theory paper a year later in 1979 but was hardly noted. The paper talks how these two foundations supported, funded and propelled the behavioral economics program. Much of the credit for behavioral economics goes to these two forums apart from the brilliant economists who have contributed to the field. It was like a mission:

She says the science world is moving towards a G-2 system with US and China as the two members. EU needs to work and catch up:

Both the European Union and the United States must adapt to the scientific surge from China and other emerging nations. In the US, decision makers fear that their open model for building scientific power, based to a great extent on recruiting talent from abroad, has passed its peak. But for the moment the US-China connection is still strong, growing, virtuous and mutually beneficial. In fact, the emerging multipolar science world looks set to be dominated by a US-China G2. With its more inward-looking perspective, the EU needs to do more than focus on internal integration. The European Research Area programme provides the framework for a European policy agenda, but this should place much greater and more urgent emphasis on building excellence and openness to researchers and their institutions from outside the EU.

Some aspects of China’s surge. So far it is mainly in the volumes game but is catching up on quality as well:

Choice is central to economics and menus become the natural companion for such research. Menus contain choices and economists are now interested in menu design and available choices. Earlier, it was believed more is better for choices and hence larger the menu better. Now with behavioral economics research we know more choices does not really mean better. There is a diminishing return after a threshold of choices and any more additions leads to lesser utility.

David Goldreich and Hanna Halaburda write this paper showing another aspect. They say what also matters is quality of menu setters. A good menu setter offers lesser choices and a better menu. The paper says:

RBI Governor D Subbarao gives a nice overview of various functions conducted by RBI. The speech is remarkably clear and I am yet to see a RBI official talking so clearly on relations of RBI with the government. Again, he is excellent bringing many ideas to the table for discussion.

He calls RBI a full service central bank managing many activities along with monetary policy.

Alphonso mangoes in Mumbai usually sell in dozens. These usually cost beginning from 1000 Rs per dozen in the beginning of the season to Rs 150-Rs 200 per dozen in peak season when supplies increase.

I noted a store was instead selling the Alphonsos as Rs 100 per kg. For a moment I said this looks cheap. Then I just reflected and said hey this is a smart nudge.

In 1 kg when gets around 4-5 mangoes and this would mean around Rs 250 – Rs 300 per dozen. This is higher than the otherwise price of around Rs 200 per dozen one is getting in the outside market. So the store is not selling cheap but making more money by offering a deal which sounds cheaper to the mind. Only when one does the calculations does he realise the difference.

And people do not make these calculations (as a rational econ would usually say) as there was quite a rush to buy the so called cheap mangoes.

Federal Deposit Insurance Corporation has prepared this interesting what-if paper which looks at what would have happened if Frank-Dodd Act (FDA) was enacted before the crisis. Would Lehman have been saved? How would the events flow if we had DFA in place?

This paper looks at the evidence and shows how a global meltdown could have been averted if we had acted on these risks earlier. Under FDA, FDIC gets new powers which allows FDIC to act for systemic financial firms like it does for banks.

The paper starts from reviewing how the events transpired after fallout Bear Stearns. Lehman came on to the radar for the next fallout i- bank. Its executives started to talk with market participants and some were willing to place equity in Lehman. But thanks to the overconfidence of Lehman execs who believed firm was worth more than the offerings, the placements did not go through. And then as people became nervous of its shaky assets and liquidity conditions, people withdrew leading to bankruptcy.

Now, the report asks what would have happened if FDIC could resolve Lehman just like it does for banks? It first lists what FDA allows FDIC to do. It then goes back to Mar-2008 to see how FDIC would have done things differently and helped prevent fallout of Lehman. The reports concludes as:

The analysis looks at the linkages between core and headline inflation in India. The findings are that core inflation moves along with headline inflation and the linkage has become stronger in 2000s. The prices of food and fuel are expected to remain elevated leading to higher inflation. The current inflation is much higher than the threshold level of inflation and is likely to hamper growth growing ahead. The paper mainly mentions monetary policy and is silent on the role of fiscal policy.

However, as we have seen fiscal policy has major impact on inflation via different channels one needs to keep a close watch on the government’s fiscal targets as well. In a research paper, RBI economists Jeevan Kumar Khundrakpam and Sitikantha Pattanaik (Global Crisis, Fiscal Response and Medium-term Risks to Inflation in India) suggest that one percentage point increase in the level of the fiscal deficit could cause about a quarter of a percentage point increase in the Wholesale Price Index (WPI). In its Annual Monetary Policy 2011-12, RBI highlights that fiscal targets set in the budget could be challenged by the higher subsidy burden stemming from higher international crude oil prices. This could put further pressure on the inflation outlook. Overall, inflation continues to remain a major risk for Indian economy.

Ejaz Ghani, Arti Grover and Homi Kharas have this interesting take on services. They say we usually think that way to rid of poverty is to push agriculture labour to labour intensive industry. Once they get higher incomes they can educate their children. The children can then move to more skill-intensive industries and services earning higher incomes and supporting their families.

The authors say the earlier beliefs about services are not really right and they could actually be used to fight poverty as well.

A super interview of Charles Fishman, a longtime writer for Fast Company magazine, is the author of “The Big Thirst,” a new book on water. Fishman looks at how US water systems have served them for 100 years but needs to change.